Question

The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $2.95 million in long-term debt, $780,000 in the common stock account, and $6.35 million in the additional paid-in surplus account. The 2018 balance sheet showed $3.75 million, $905,000, and $8.15 million in the same three accounts, respectively. The 2018 income statement showed an interest expense of $280,000. The company paid out $500,000 in cash dividends during 2018. If the firm's net capital spending for 2018 was $750,000, and the firm reduced its net working capital investment by $125,000, what was the firm's 2018 operating cash flow, or OCF?

Answer 1

Cash Flow to Creditors

Cash Flow to Creditors = Interest Expenses Paid – Net Increase in Long term debt

= Interest Expenses Paid – [Long term debt at the end – Long term Debt at the Beginning]

= $280,000 – [$3,750,000 - $2,950,000]

= $280,000 - $800,000

= -$520,000

Cash Flow to Stockholders

Cash Flow to Stockholders = Dividend Paid – Net New Equity

= Dividend Paid – [(Common stock at the end + Additional paid-in surplus account at the end) - (Common stock at the beginning + Additional paid-in surplus account at the beginning)

= $500,000 – [($905,000 + $8,150,000) – ($780,000 + $6,350,000)]

= $500,000 – [$9,055,000 - $7,130,000]

= $500,000 - $1,925,000

= -$1,425,000

Cash Flow from assets

Cash Flow from assets = Cash Flow to Creditors + Cash Flow to Stockholders

= -$520,000 - $1,425,000

= -$1,945,000

Operating Cash Flow  

Operating Cash Flow using the Cash Flow from assets Equation

We know, Cash flow from assets = Operating Cash flows – Change in Net Working capital – Net Capital Spending

-$1,945,000 = Operating cash flow – (-$125,000) - $750,000

Operating cash flow = -$1,945,000 - $125,000 + $750,000

Operating cash flow = -$1,320,000 (Negative)

Therefore, the firm's 2018 operating cash flow, or OCF is -$1,320,000 (Negative)